QLACs: The Only Annuity That Reduces Your Required Minimum Distributions

What Is a QLAC?

Qualified Longevity Annuity Contract (QLAC)Qualified Longevity Annuity Contract (QLAC)

A deferred income annuity purchased within a qualified retirement account (Traditional IRA, 401(k), 403(b), or governmental 457(b)) that receives a special tax exemption: the QLAC premium is excluded from the account balance used to calculate required minimum distributions (RMDs). Income can be deferred up to age 85. Maximum premium is $200,000 per person under the SECURE 2.0 Act. Guarantees are backed by the issuing insurer’s financial strength and claims-paying ability. Not FDIC-insured.

A QLAC solves two problems at once: it reduces your tax bill today by lowering required minimum distributions, and it guarantees income tomorrow for the years when longevity risk is greatest.

Here is the core idea. When you turn 73, the IRS forces you to withdraw a minimum amount from your IRA or 401(k) every year — your required minimum distribution (RMD). These withdrawals are taxable, and for retirees with large qualified accounts, they can push you into a higher tax bracket or trigger Medicare premium surcharges (IRMAA). A QLAC removes up to $200,000 from that RMD calculation, reducing your annual tax hit while converting those funds into guaranteed lifetime income that begins when you choose.

QLACs were created by Treasury regulations in 2014 and significantly expanded by the SECURE 2.0 Act in 2022, which raised the maximum premium from $145,000 to $200,000 and eliminated the old 25%-of-account-balance limit. These changes made QLACs accessible and practical for a much wider range of retirees.

How a QLAC Works: Step by Step

1. You purchase a QLAC inside your qualified account. The premium (up to $200,000) is transferred from your Traditional IRA, 401(k), or other eligible account to an insurance company. The purchase itself is not a taxable event.
2. Your RMD base drops immediately. The QLAC premium is subtracted from your account balance for RMD calculations. If your IRA was $800,000 and you buy a $200,000 QLAC, your RMDs are now calculated on $600,000 — a 25% reduction in taxable distributions.
3. You choose when income starts (up to age 85). Common choices: age 75, 80, or 85. Later start = higher monthly payment.
4. During the deferral period — lower RMDs. You continue taking RMDs from the remaining (non-QLAC) portion of your IRA, but the RMD amounts are smaller because the QLAC premium has been removed from the calculation. This tax savings compounds each year.
5. When income starts — guaranteed payments for life. Monthly payments begin at your selected age and continue for life. All payments are fully taxable as ordinary income (since funded with pre-tax qualified money). QLAC payments satisfy your RMD obligation for the year they are received.

The QLAC Tax Advantage: RMD Reduction

Tax Disclaimer:

How the RMD exemption works

The RMD exemption is what makes a QLAC different from a standard DIA purchased inside an IRA. Without a QLAC, every dollar in your IRA — including money in a standard DIA — is included in your RMD calculation. With a QLAC, the premium amount is subtracted before the calculation.

Illustrative example

Scenario:

Without QLAC:

With QLAC:

$7,547 less in taxable income

Cumulative impact:

Note: These figures are illustrative, using 2026 IRS life expectancy tables. Actual RMDs depend on your specific account balance and age. The tax savings depend on your marginal rate.

Who benefits most from the RMD reduction?

The tax savings are largest for retirees who meet one or more of these criteria:

• Large IRA balances ($500K+): Larger accounts mean larger RMDs and higher tax impact
• Near or above a tax bracket boundary: Reducing RMDs by $7,000–$10,000 annually may keep you in a lower bracket
• Near IRMAA thresholds: Medicare Part B and D premiums increase when modified adjusted gross income exceeds certain levels. Reducing RMDs can keep you below these thresholds, saving $1,000–$5,000+ per year in premium surcharges
• Subject to Net Investment Income Tax (NIIT): Lower AGI from reduced RMDs can help avoid the 3.8% NIIT surcharge
• Receiving Social Security: Lower income from reduced RMDs may reduce the portion of Social Security benefits subject to tax

SECURE 2.0 Act: How QLACs Changed in 2022

The SECURE 2.0 Act of 2022 made three significant changes that expanded QLAC accessibility:

Rule: Maximum premium | Before SECURE 2.0: $145,000 (or 25% of account balance, whichever less) | After SECURE 2.0 (Current): $200,000 (no percentage limit)

Rule: Percentage-of-balance limit | Before SECURE 2.0: 25% of total qualified account balance | After SECURE 2.0 (Current): Eliminated — flat $200,000 regardless of account size

Rule: Inflation indexing | Before SECURE 2.0: Yes, in $10,000 increments | After SECURE 2.0 (Current): Yes, in $10,000 increments

Rule: Roth 401(k) RMDs | Before SECURE 2.0: Roth 401(k) subject to RMDs | After SECURE 2.0 (Current): No RMDs for Roth 401(k) (eliminating potential QLAC use case)

Rule: RMD starting age | Before SECURE 2.0: Age 72 | After SECURE 2.0 (Current): Age 73 (increasing to 75 in 2033)

The elimination of the 25% limit was the most impactful change. Previously, someone with a $400,000 IRA could only put $100,000 into a QLAC (25% of $400K), even though the dollar cap was $145,000. Now, anyone with at least $200,000 in qualified accounts can purchase the maximum QLAC regardless of total account size.

QLAC vs. Standard DIA: Key Differences

Feature: Funding source | QLAC: Qualified accounts only (IRA, 401k, 403b, 457b) | Standard DIA: Any source — qualified, non-qualified, 1035 exchange

Feature: Maximum premium | QLAC: $200,000 per person (SECURE 2.0) | Standard DIA: No limit

Feature: RMD exemption | QLAC: Yes — premium excluded from RMD calculation | Standard DIA: No — premium still included in RMD base

Feature: Latest income start | QLAC: Age 85 | Standard DIA: No regulatory limit (carrier-specific, typically up to age 95+)

Feature: Death benefit during deferral | QLAC: Generally required (ROP standard on most contracts) | Standard DIA: Optional — ROP available but not required

Feature: Tax on payments | QLAC: 100% taxable as ordinary income | Standard DIA: Non-qualified: exclusion ratio (partial tax-free). Qualified: 100% taxable.

Feature: Roth IRA eligible | QLAC: No | Standard DIA: Yes (though no RMD benefit from Roth)

Feature: Payout options | QLAC: Same: Life, Period Certain, Joint, Refund | Standard DIA: Same: Life, Period Certain, Joint, Refund

Feature: Best for | QLAC: Reducing RMDs while creating future income from IRA/401k | Standard DIA: Creating future income from any source, no premium limit

When to use which:

QLAC

standard DIA

Which Accounts Qualify?

• Eligible for QLAC — Traditional IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b), Governmental 457(b)
• NOT Eligible for QLAC — Roth IRA (no RMDs during owner’s lifetime), Roth 401(k) (no RMDs under SECURE 2.0), taxable brokerage accounts, savings accounts, non-qualified annuities

Roth IRAs are not eligible because they are not subject to RMDs during the owner’s lifetime under SECURE 2.0. Since the entire purpose of a QLAC is to defer RMDs, there is no tax benefit to purchasing one inside a Roth. If you want a deferred income annuity from a Roth IRA, you can purchase a standard DIA — but you would not receive any RMD exemption (nor would you need one).

The $200,000 limit is per person, not per account

If you have multiple IRAs, you can split the QLAC purchase across accounts or buy from a single IRA, but the total across all qualified accounts cannot exceed $200,000. Married couples can each purchase up to $200,000 from their own respective qualified accounts, for a combined household total of $400,000.

Who Should Buy a QLAC?

Appropriate For:

• IRA/401(k) holders aged 60–75 with $500,000+ in qualified accounts
• Those whose RMDs push them into a higher tax bracket or trigger IRMAA
• Retirees who don’t need all their RMD income for current expenses
• Those who want guaranteed income starting at age 75–85 as longevity insurance
• People who have other income sources (Social Security, pensions, non-qualified savings) covering current needs
• Those who want a dual benefit: tax reduction now + guaranteed income later
• Married couples who can each purchase a QLAC for combined $400,000 in RMD reduction

Not Suitable For:

• Anyone with less than $300,000 in qualified accounts (tying up $200K leaves too little liquid)
• Roth IRA holders (no RMDs to reduce)
• Those who need all their qualified funds for current expenses
• Anyone who will need the $200,000 lump sum before the income start date
• Those in a low tax bracket where RMD reduction provides minimal savings
• Anyone with short life expectancy (may not live to receive income)
• Those who already have sufficient guaranteed income from pensions and Social Security
• Anyone over 80 (limited deferral period reduces both tax and income benefits)

The “sweet spot” QLAC buyer

The ideal QLAC candidate is a retiree aged 65–73 with $700,000+ in a Traditional IRA, whose RMDs at age 73 will push them above the 22% bracket into the 24% bracket (or near an IRMAA threshold), who has Social Security and/or a pension covering current living expenses, and who wants guaranteed income starting at age 80–85 as longevity insurance. This profile extracts maximum value from both the tax reduction and the guaranteed income.

How to Buy a QLAC

1. Verify the tax benefit matters for your situation. Calculate your projected RMDs at age 73+ and determine whether reducing them by up to $200,000 would meaningfully lower your tax bracket, IRMAA exposure, or NIIT risk. If you are already in a low bracket, the QLAC tax benefit may be minimal.
2. Determine your premium. You can purchase up to $200,000. But you do not have to use the full amount — a smaller QLAC still provides an RMD reduction proportional to the premium. Ensure you retain enough in your IRA for current and near-term RMDs and expenses.
3. Choose an income start age. Age 75, 80, or 85 are the most common choices. Later start = higher monthly payment + longer RMD deferral benefit. Consider when you expect to need the income most — many QLAC buyers target age 80–85 when portfolio depletion risk is highest.
4. Select a payout option. Life with Period Certain (most popular) provides lifetime income with beneficiary protection. Joint and Survivor is essential for married couples. Most QLACs include return-of-premium during deferral by default.
5. Get quotes from multiple carriers. QLAC payout rates vary between carriers. An independent agent can compare rates from multiple insurers for your specific age, start date, and premium amount.
6. Verify carrier financial strength. Your QLAC commitment may span 15–25+ years. Choose A.M. Best A- (Excellent) or better.
7. Coordinate with your tax advisor. A QLAC purchase has direct tax implications that should be reviewed by your CPA or tax advisor before execution. They can confirm the RMD reduction, project multi-year tax savings, and ensure the QLAC fits your broader tax strategy.